Shanghai stages late-round comeback

China benchmark shrugs off early 7.3% loss to end higher

By

ChrisOliver

HONG KONG (MarketWatch) -- China's Shanghai Composite Index recovered from a plunge early in the session to end in positive territory Tuesday, capping a wild day of trading that towed some of Asia's other markets along for the roller-coaster ride.

Traders were at a loss to pinpoint reasons for the reversal, which came in the final hours of trading. Some said it was linked to speculation the government may unveil new policies to support the market, while other rumors suggested Beijing may scrap last Wednesday's decision to lift the trading tariff on stock trades.

The benchmark Shanghai Composite ended 2.6% higher, rising 96.70 points to 3,767.10, in a stunning comeback that more than erased a 7.3% deficit seen in early trading.

The Shenzhen Composite index, which tracks shares on the smaller of China's two exchanges, closed up 2.5% at 1,039.90. The Dow Jones China 88 Index ended 3.4% higher at 310.29.

Markets elsewhere in Asia firmed slightly in afternoon trading, although benchmarks in Australia, Thailand, Singapore and Indonesia ended lower on the day.

The Shanghai benchmark fell 8.3% Monday on concerns that authorities may impose additional tightening measures to cool speculative activity. Last week, authorities raised taxes on individual stock trades to 0.3% from 0.1%, in an effort to tamp down what's widely perceived as growing speculative mania within the nation's stock markets.

At its intraday low, the Shanghai benchmark was down 21% from last Tuesday's all-time high of 4,335.96, moving the average price-to-earnings ratio among Chinese blue chips down to 25 times 2007's earnings from about 30 times before the sell-off began.

Analysts said it was unlikely the government would backtrack on its efforts to clamp down on speculative trading, adding there were no official statements from state news sources that such a move was under consideration.

'We don't see a reason to panic because we believe further downside will likely be limited due to robust earnings per share growth and deflated valuation.'
Steven Sun, HSBC

"For the short term, I am just taking it as a trading pattern," said Pauline Dan, a fund manager with Manulife Asset Management in Hong Kong. "I don't see any fundamental changes to what the government wants to do."

Reversal of fortunes

Additional reports suggested the rebound was driven by speculation that the finance ministry, securities regulators and others were groups were planning to hold talks on how to support the market.

Some traders said the rebound was driven by institutional buyers stepping in to snap up reasonably priced shares after retail investors dumped holdings in the morning session. Fund managers may also have taken heart after Chinese securities regulators approved three fund-management companies to launch new A-share funds Tuesday, with the move reflecting the government's efforts to nudge forward market-supportive measures.

"In the afternoon, there was a sense that because the correction had already run quite far, the government won't have any intention to take further tightening measures, so this led to the rebound in the A-share market," said Kitty Chan, fund manager and director of Cash Asset Management in Hong Kong.

"I think the correction in A shares has already appeared. I don't think we will have further correction in China," Chan added.

The H-share index, a measure of mainland incorporated stocks listed in Hong Kong, bounced from a 0.9% deficit at the mid-session break to trade 0.8% higher. The H-share index closed at 11,022.09, not far off its all-time high of 11,133.36.

In Monday's trading, Hong Kong's H-share index ended in positive territory despite declines on China's two leading stocks markets, spurring speculation mainland investors were channeling funds in to Hong Kong-listed China stocks in an effort to arbitrage the valuation gap.

"We don't see a reason to panic because we believe further downside will likely be limited due to robust earnings per share growth and deflated valuation," wrote Steven Sun, regional equity strategist with HSBC, in a note to clients, referring to the Chinese share market.

Sun says the Shanghai Composite's likely to trade around the 3,500 level at the end of 2007, implying a slightly lower outlook.

Energy in focus

In other regional action, Japanese markets notched modest gains as investors bought shares of Nippon Oil and other commodity-oriented shares after crude-oil prices rose in New York.

Crude for July delivery fell 34 cents to $65.87 a barrel in after-hours trading. The benchmark contract climbed $1.13 a barrel in Monday's trading on the New York Mercantile Exchange.

Energy traders reacted to reports that a cyclone may hit the Persian Gulf in the next 24 hours. The U.S. Navy has warned coalition military ships in the Gulf to prepare for Cyclone Gonu, according to reports.

The Middle East accounts for 41% of global oil exports, so any disruption to shipping and loading activities could lead to global supply shortages, traders said.

And in Hong Kong, CNOOC Ltd. (883)
CEO, +2.00%
the mainland's largest offshore oil producer, climbed 4.4% to a record close of HK$8.05 ($1.03) after brokerage HSBC lifted its price target on the shares to HK$9.50, citing higher oil prices and proven overseas reserves.

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